The MAX Corporation is planning a $4,000,000 expansion this year.The expansion can be financed by issuing either common stock or bonds.The new common stock can be sold for $60 per share.The bonds can be issued with a 12 percent coupon rate.The firm's existing shares of preferred stock pay dividends of $2.00 per share.The company's corporate income tax rate is 46 percent.The company's balance sheet prior to expansion is as follows:
MAX Corporation

a.Calculate the indifference level of EBIT between the two plans.
b.If EBIT is expected to be $3 million,which plan will result in higher EPS?

Question

The MAX Corporation is planning a $4,000,000 expansion this year.The expansion can be financed by issuing either common stock or bonds.The new common stock can be sold for $60 per share.The bonds can be issued with a 12 percent coupon rate.The firm's existing shares of preferred stock pay dividends of $2.00 per share.The company's corporate income tax rate is 46 percent.The company's balance sheet prior to expansion is as follows:
MAX Corporation
  
a.Calculate the indifference level of EBIT between the two plans.
b.If EBIT is expected to be $3 million,which plan will result in higher EPS?

Quizplus · Accepted Answer

The Answer of The MAX Corporation is planning a $4,000,000 expansion this year.The expansion can be financed by issuing either common stock or bonds.The new common stock can be sold for $60 per share.The bonds can be issued with a 12 percent coupon rate.The firm's existing shares of preferred stock pay dividends of $2.00 per share.The company's corporate income tax rate is 46 percent.The company's balance sheet prior to expansion is as follows:
MAX Corporation
  
a.Calculate the indifference level of EBIT between the two plans.
b.If EBIT is expected to be $3 million,which plan will result in higher EPS?

The MAX Corporation Is Planning a $4,000,000 Expansion This Year